Vice Fund tempted by more than tobacco and booze

The eternal question of where and when to invest in the stock market is even more prominent after the long bull run. Jittery investors are debating the pros and cons of the best havens for their investments.

For investors in the Vice Fund, the wages of sin are proving very attractive, if a morally questionable bet.

Down the decades, stocks associated with alcohol, tobacco, gambling, and arms have consistently proven secure investor refuges during times of economic turmoil.

Established in 2002, USA Mutuals’ Vice Fund last year celebrated its 15-year track record by returning 11.5% annually, outpacing the 9.91% return of the S&P 500.

“The Vice Fund’s unique approach to investing results in owning companies that have historically delivered strong shareholder value throughout several types of market cycles — many of which are generationally great American success stories,” says Jordan Waldrep, portfolio manager of the Vice Fund.

He says such stocks can prepare and lessen the risks for investors looking to emerging stock market-listed companies involved in cannabis, for example.

Such an all-weather strategy continues to exemplify the fund’s investment approach.

While so-called sin stocks include companies whose activities might be viewed as unethical or immoral, there may be good reasons to include them in an investment portfolio.

“In the long term, vice investing makes sense because these are often well-managed companies with established brands and extremely loyal customers,” says Mr Waldrep.

On paper, sin stocks represent the kinds of companies investors should want to own for the long haul but which they often shy away from because they are considered socially taboo or have a negative reputation. That is a missed opportunity.

Vice sectors have “excellent global tailwinds for growth” tied to the emerging markets, he believes, and often trade at a discount as investors ignore them.

“The result is that investors can buy vice stocks that offer growth at a relative discount in the market,” he says.

In times of turbulence, such stocks offer varying degrees of stability when the mainstream market dips.

“Vice stocks have historically performed well because people will continue to drink, smoke, and own guns, but investing in these types of companies isn’t for everyone,” he acknowledges.

Companies operating in the vice sectors tend to have more predictable customers whose habits are generally unaffected by market conditions.

“Smokers, drinkers, and governments ordering airplanes purchase these products in good and bad economic times at a much more foreseeable rate,” says Mr Waldrep.

“Skilled investors think about risk all the time but what risk really comes down to is uncertainty. Vice companies carry the same general level of risk as the rest of the stock market, but the predictability of these consumers means there is potentially less uncertainty, thus less risk,” says Mr Waldrep.

In addition, buying stock in vice companies is often relatively cheaper, despite them being financially sound, well run, and with strong positions in their end markets.

“These companies create products frowned upon by society, and as a result, they are often ignored by significant portions of the investing community. Therefore these equities are more prone to under-valuation in the market, and that presents an opportunity,” says Mr Waldrep.

The continued legalisation of cannabis across the US and Canada offers a new addition to the potential vice stocks portfolio.

With the alcohol and tobacco industries in the US currently deriving over 90% of their sales from a relatively small group of core consumers, the cannabis market may have a similar consumer profile.

The Vice Fund has identified three groups of American cannabis consumers and believes that as legislation proceeds a “staggering” market of as many as 59m North American consumers will emerge, in the long term Mr Waldrep plans to position the Vice Fund accordingly.